Remember That Jobless Recovery? China’s Fault

As trade with China continues to be a potent political issue on Capitol Hill, academics have increasingly looked in detail at the downside of U.S. moves to liberalize trade.

Take the case of the U.S. recession of 2001, which followed the bursting of the tech bubble and was mild by most measures. It lasted eight months. GDP declined just a bit. Unemployment topped out at 5.5% during the downturn.

European Pressphoto Agency

A toy factory in Fujian province

But it also ushered in a huge decline in manufacturing employment. About 1.5 million manufacturing jobs were lost in the first year of that downturn –and continued to fall for years afterward– far more than the 900,000 manufacturing jobs lost in the first year of the so-called Great Recession of December 2007 through mid-2009.

What happened? In a word: China.

Economists Justin Pierce of the Federal Reserve Board and Peter Schott of Yale University’s School of Management argue in a recent paper that import competition from China had a devastating impact on U.S. manufacturing jobs. Especially interesting is that the competition wasn’t spurred by tariff cuts. Instead, it was congressional passage of “permanent normal trade relations,” or PNTR, the wonkish term used by the U.S. to note that China was entitled on a regular basis to the lowest tariff rates the U.S. grants to its other trading partners. China won PNTR in 2000 when it cut a deal with the U.S. to join the World Trade Organization.

“PNTR is notable for having had little effect on the tariffs actually applied to Chinese imports,” the two write. “Rather the principal impact of PNTR was to eliminate uncertainty.” Before that, China had to go through a yearly battle to get such trading status—one whose outcome was always somewhat in doubt given the enmity toward China of many in Congress.

The two economists compared industries that would have had the highest protection from tariffs if China failed to get PNTR versus those where tariffs didn’t matter much. They found that the combination of a reduction in uncertainty over tariff increases and the ability of China to quickly turn itself into the world’s factory floor led to a vast increase in Chinese imports, whose effect was to overwhelm lower-end U.S. manufacturing jobs.

“Manufacturing employment would have been higher by over 4 million employees in 2007 without the effect of PNTR” for China, the economists calculate.

The Pierce-Schott paper is one of a number of academic studies in recent years to detail the costs to the U.S. of liberalized trade. Last year, three prominent economists, David Autor, of Massachusetts Institute of Technology, David Dorn of the Center for Monetary and Financial Studies in Madrid and Gordon Hanson of the University of California at San Diego concluded that localities whose businesses were especially exposed to competition by Chinese imports were beleaguered by higher unemployment and lower wages. They also estimated “conservatively” that competition from China accounted for one-quarter of the overall decline in U.S. manufacturing employment between 2000 and 2007

The authors of the two papers generally don’t consider themselves opponents of liberalized trade. But the more detailed scrutiny of the downsides of trade is a big change from a decade ago when technological advances, much more than import competition, was blamed for manufacturing and wage declines. (Remember the derision heaped on Ross Perot and his “giant sucking sound” of the jobs that would head to Mexico as a result of the North American Free Trade Agreement? A lot of the jobs wound up in China instead.)

In the restrained language of academia, Messrs. Autor, Dorn and Hanson wrote, “the consequences of China trade for U.S. employment, household income, and government benefit programs may contribute to public ambivalence toward globalization and specific anxiety about increasing trade with China.”

What should be done?

In e-mailed responses, Mr. Schott didn’t back trade restrictions. He noted that his study also showed that PNTR coincided with a large increase in labor productivity “because, even though manufacturing employment fell, manufacturing value-added kept rising,” he said. Rising productivity is generally a boon to the U.S. economy and, without it, U.S. wages wouldn’t climb. (Falling prices for imports also benefit Americans as consumers and probably pump up employment in retailers, advertisers and other firms that sell goods to Americans. )

Additionally, he said, if China hadn’t won PNTR it’s possible that many of those manufacturing jobs lost would have wound up in other low-wage countries. “I think the rationalization of U.S. manufacturing would have continued as a result of continued liberalizations and reductions in the cost of managing global supply chains, albeit more slowly,” according to Mr. Schott.

Ultimately, education is the answer, Mr. Schott said. “The U.S. should ensure that it has an educational system that is designed to build a highly skilled work force and is capable of helping workers retrain mid-career as the economy evolves,” he concluded.

Trouble is, academics always point to education as the solution. That isn’t much solace for unemployed workers, especially given the failures that plague many retraining programs.

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